6 Ways to Look at Gold

Gold had a very negative Weekly Key Reversal Down last week…it has trended lower from $1800 since October 2012…it SHOULD be getting a lift from the dramatic Japanese reflationary activities…indeed it traded to All Time Highs against the Yen…but it’s weak against a number of other important measures…it’s trading at 12 month lows against the Euro…it’s fallen ~13% against WTI in the last 6 weeks…and in terms of the S+P 500 gold is at 2 year lows…stocks are stealing “market share” from gold…see charts below.

Negative price action:

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Gold saw very negative price action…foreshadowing lower prices ahead… on November 28 when it fell $40 on the Comex futures market on All Time Record High Volume…(I discussed that price action on my November 30 blogand speculated that a break of $1700 could ignite some real downside pressure.) In November 2012 the selling pressure on gold seemed restricted to the “paper” futures market…anecdotal reports were that “physical” gold buying was increasing as prices fell…indeed, outstanding Gold ETF’s rose to new record highs in early December.

But now the bearish Market Psychology seems broad based…the selling is not just in the “paper” market…gold ETFs are declining and the gold share market is a disaster…the HUI/Gold ratio is at an 11 year lows (save for a very brief period in October 2008) and other gold share/gold ratios are also at multi-year lows…as the gold share indices themselves fall to new lows. I cautioned against buying gold shares several times last year…I called it, “The mistake you are dying to make”…in addition to the usual reasons given for the gold share weakness [gold ETFs, rising operating costs, country risk etc.] I suggested that there were simply WAY TOO MANY gold shares outstanding…that the SUPPLY of gold shares had overwhelmed DEMAND.

The Weak US$/Strong Gold relationship is breaking down…because the Euro is strong:

Gold is falling in US$ terms even as the US$ falls relative to the Euro. Last summer the Euro was under severe pressure…trading at 2 year lows near 1.20…Spanish bond yields were north of 7% and short term interest rates in several of the “strong” European countries were trading at negative nominal yields…then Draghi made his “whatever it takes” comments and the Euro has been climbing ever since…now very close to last year’s highs of 1.35 against the US$ …up 22% in the last 4 months against the Yen…obviously there has been a serious change in Euro Market Psychology and some serious “short covering” in the Euro…and not just against the US$.

A Gold Bug sees what he wants to see, and disregards the rest…Gold to Germany:

With apologies to Paul Simon…I don’t see any bullish significance in Germany’s plan to repatriate some of their gold. They moved the gold away from the Russian Front during the Cold War…now they think it’s safe to move it back home. The Gold Bugs, however, see the repatriation plan as bullish because they believe that the German gold is “missing” (along with a lot of other gold that is supposedly in secure storage at the Fed and the BOE.) Their theory is that the gold has been fraudulently sold into the market to keep prices down…and that Germany’s plans will expose this fraud and gold prices will soar.

Charts:

Gold had a Weekly Key Reversal Down last week…setting up a possible challenge of the late December $1625 lows.

Gold is trading near last year’s lows in terms of the Euro…down over 10% from the All Time Highs made last September.

But in terms of the Japanese Yen Gold made new All Time Highs in early January.

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In terms of the S+P 500, however, gold is trading at 2 year lows…down 32% from the 23 year highs made August 2011…(gold is down 13% against the US$ since then)…global stock markets have greatly out-performed gold…and especially gold stocks since the summer of 2011.

While gold has trended down from its All Time Highs made September 2011 the S+P 500 (and most other global stock indices) have trended higher. The S+P is now at 5 year highs…only 5% away from its ATH made October 2007. Market Psychology is very bullish in stocks…the VIX is at a 5 ½ year low…the market thinks it has a “blank check” from the Central Banks…and stocks are clearly stealing “market share” away from gold.

Gold share indices are even weaker than gold…with the HUI at an 11 year low (save for a very brief period in Oct 2008) against Gold.